Q3 2024 The Coca-Cola Co Earnings Call
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Speaker Change: At this time I'd like to welcome everyone to the Coca Cola Company's third quarter 2024 earnings results Conference call.
Speaker Change: Today's call is being recorded.
Speaker Change: Any objections. Please disconnect at this time.
Speaker Change: All participants will be on listen only mode until the formal question and answer portion of the call.
I would like to remind everyone that the purpose of this conference is to talk with investors and therefore questions from the media will not be addressed.
Speaker Change: Media participants should contact Coca Cola's Media Relations Department, if they have any questions.
Speaker Change: I would now like to introduce MS. Robyn Halpern, Vice President and head of Investor Relations Ms. Hawthorne you may now begin.
Robyn Halpern: Good morning, and thank you for joining us I'm here with James Quincey, Our chairman and Chief Executive Officer, and John Murphy, Our President and Chief Financial Officer.
Robyn Halpern: We've posted schedules under financial information in the investors section of our company website. These reconcile certain non-GAAP financial measures that may be referred to this morning to results as reported under generally accepted accounting principles.
Robyn Halpern: You can also find schedules in the same section of our website that provide an analysis of our gross and operating margins.
Robyn Halpern: This call may contain forward looking statements, including statements concerning long term earnings objectives, which should be considered in conjunction with cautionary statements contained in our earnings release and in the company's periodic SEC report.
Speaker Change: Following prepared remarks, we will take your questions. Please limit yourself to one question reenter the queue to ask any follow ups now I will turn the call over to James.
James Quincey: Thanks, Robin and good morning, everyone. After a good first half of 2020 full we navigated through a dynamic external landscape during the third quarter.
James Quincey: Obviously, it's again proved to be resilient.
James Quincey: <unk> declined 1% in the quarter driven by a slow start in July.
James Quincey: However, our business trends improved each both notably trademark Coca Cola volume outperformed during the quarter.
James Quincey: Our year to date 2020 full performance gives us confidence we will deliver at the high end of our previous top line guidance and earnings growth of 5% to 6%, including approximately 90% of currency headwinds.
James Quincey: With that as context, I'll start with an update on the global consumer landscape and a review of the third quarter business performance.
James Quincey: Then I'll explain how we're delivering on our objectives by staying agile and improving execution of our strategy across each facet of our growth flywheel.
James Quincey: Jo Malone by discussing financial details for the quarter, our updated guidance for full year 2024, and some early considerations for 2025.
During the quarter global consumer sentiment and spending in aggregate held up well and our broader industry continued to expand in this context, we delivered robust organic revenue growth with value share gains in both at home and away from home channels.
James Quincey: We also expanded comparable margins.
James Quincey: This led to 5% comparable earnings per share growth, despite nearly double digit currency headwinds and the impact of bottler Refranchising. We continued to demonstrate staying power as the beverage industry remains attractive with many strong new and existing players.
James Quincey: Our system is well positioned to develop a commercial beverage industry in many markets and capture long term balanced growth.
James Quincey: Across the World, we are leveraging our scale, our local expertise to navigate very local market dynamics.
James Quincey: In North America, we generated robust top line growth and one value share.
James Quincey: Trademark Coca Cola in sparkling flavors, both grew volume.
James Quincey: During the quarter and year to date trademark Coca Cola and furlough. It we're the leaders in the beverage industry in at home retail sales growth.
James Quincey: Consumers are responding well to shop, our value messaging in away from home channels, and we're continuing to drive affordable and premium packages across our total beverage portfolio to realize positive mix.
James Quincey: In Latin America volume was flat during the quarter as we cycled strong growth in the prior year.
James Quincey: We had solid revenue growth led by Coca Cola Zero Sugar Empire right.
James Quincey: We also benefited from integrating marketing activations across the region.
James Quincey: For example, in Brazil rock in Rio reached over 70 million people and let the trademark Coca Cola being the most mentioned brand on tick tock.
James Quincey: Stepped up execution by increasing cooler placement and investing in digital capabilities is also driving results in EMEA. We saw improved performance in Europe and strong growth across many parts of Africa. The performance in Eurasia, and Middle East and North Africa unfavorably impacted overall results in.
James Quincey: In Europe, we grew volume during the quarter as benefits from the Olympic and Paralympic games, both fuze tea and Powerade continued their strong momentum and we're continuing to focus on affordable price points value packages tailored promotions are premium offerings to drive demand.
James Quincey: In Eurasia, and middle East a confluence of headwinds led to declining volume wise.
James Quincey: While it's fair to assume pressure will persist in the near term we are taking action.
James Quincey: Our system is driving affordability and availability.
James Quincey: We're leaning into the local intrinsic to that business.
James Quincey: In Africa volume declined largely due to pressure in some north Africa markets out.
James Quincey: Side of these markets, we grew volume and gained value share.
James Quincey: System is investing for the long term by accelerating refillable offerings cooler placements and increasing manufacturing capacity.
James Quincey: Lastly, in Asia Pacific Despite weakness in China, and a couple of markets in Southeast Asia, We grew organic revenue and comparable operating income.
James Quincey: In ASEAN and South Pacific, we gained value share led by the Philippines and Australia.
James Quincey: Philippines grew affordable transactions with refillable packages and group premium transactions with single serve offerings.
James Quincey: Australia prioritized affordability initiatives across our sparkling portfolio and successfully activated the Olympic games with pyrite in Japan, and South Korea, We had solid volume growth one value share due to good traction on brand relaunches, which leveraged enhance taste and refreshed packaging and stepped up performance in E comm.
James Quincey: MS channels in China, a challenging operating environment and strategic re prioritization of our portfolio led to a decline in volume.
James Quincey: We're continuing to focus on driving affordability across our core portfolio.
James Quincey: Our longer term growth ambition is unchanged and we are investing to come out ahead when conditions improve.
James Quincey: India volume declined in states impacted by higher than normal monsoons in geographic areas that were unaffected volume grew mid single digits, we remain upbeat about progress and integrated execution of our ability to capture long term growth opportunity.
James Quincey: To sum everything up.
James Quincey: While our markets continue to move in many different directions, and our agility is being put to the test and all weather strategy is working.
James Quincey: We're continuing to deliver on our strategy through a combination of world class marketing and innovation and excellence and revenue growth management and execution.
James Quincey: Starting with marketing and innovation are refreshed marketing model is integrating digital life and retail experiences to connect with consumers in unique and personalized ways.
James Quincey: The Olympic and Paralympic Games is a great example.
James Quincey: We featured our total beverage portfolio launched fan zones, and festivals and leverage social channels to increase connections with athletes many of our brands offered customized packaging and our system activated tailored point of sale displays with customers around the world.
James Quincey: The Olympic and Paralympic games were activated with customers across over 65 market.
James Quincey: Featured nearly 250 influences and demonstrated positive engagement schools across our portfolio.
James Quincey: Topo Chico is another example in the U S. Topo Chico is the number one premium sparkling water brand.
James Quincey: Driven strong consumer demand with the grass roots experiential campaign in 13 cities featuring impactful displays collecting topo Chico to food music and art.
James Quincey: In Mexico, we are applying a similar playbook.
James Quincey: We recently launched top of Chico's first of a nationwide experiential activation with the things like an office campaign. This featured connections with local artists across 69 events in five cities and with amplified through social channels.
James Quincey: During the quarter Topo Chico trademark grew volume nearly 20% globally year.
Year to date volume has increased tenfold compared to pre acquisition levels in 2016.
James Quincey: Our marketing and innovation agenda emphasizes a culture of acting boldly learning and not being afraid to fail.
James Quincey: Scaling successes.
James Quincey: Sometimes our innovations don't hit the mark as evidenced by Coca Cola Spice, which we've discontinued.
James Quincey: But our focus on bigger and bolder innovations is paying off.
James Quincey: <unk> is a multi year success and is scaling well across over 80 markets.
James Quincey: Our minute maid zero sugar is showing promise.
James Quincey: <unk> also delivered over $50 million in retail sales of only 21 weeks in the market and has been extended after a successful limited Rob. We also innovate for different reasons. It can be to generate short term buzz such as the third quarter launch of the limited edition product Coca Cola zero Sugar Oreo.
James Quincey: She is available in over 35 markets.
James Quincey: And finally, the beetle juice, which is our first ever Global's Halloween activation and is offered in nearly 50 markets or we might invest for the long term such as our announcement of plans to debut Bacardi mixed with Coca Cola in 2025.
James Quincey: So far in 2024 overall, we benefited from strong velocities on our innovation and we're continuing to improve our innovation success rates versus prior year.
James Quincey: Moving across our flywheel system as step changing execution by fully integrating our marketing and commercial plans and investing to grow our customers' businesses leveraging data and digitally enabled solutions, including AI is a huge opportunity.
James Quincey: And we're integrating digital advertising with point of sale messaging and offering brand price pack architecture geared to customer's individual needs.
James Quincey: When executed efficiently. This approach can deliver promising uplift in retail sales for our customers.
While we're focused on taking our capabilities to the next level. We're also working towards mass during the foundations that move the needle.
James Quincey: In 2024 system increased availability by investing in cold drink equipment and boosted our share of visible coal inventory across markets in the past 12 months, we created $11 billion in incremental retail sales for customers, which is more than double the next five close to these beverage companies combined from.
James Quincey: From 2018 to 2023, we were the leader in customer value creation for the beverage industry every year.
James Quincey: To summarize we feel good about the momentum of our business and as we look ahead, our external environment will continue to have many moving pieces will continue to prioritize flexibility to navigate market dynamics locally to deliver on our global objectives.
James Quincey: As to the power of our portfolio our system's.
<unk> systems unique capabilities and the unwavering dedication of our system employees with comfort that we will be able to deliver on our 2020 full guidance and longer term priorities.
Speaker Change: That I will turn the call over to John.
John Murphy: Thank you James and good morning, everyone today I'll comment on our third quarter performance discuss the outlook for the remainder of 2024.
John Murphy: I'll provide some early commentary on 2025.
John Murphy: During the third quarter, we grew organic revenues 9%.
John Murphy: Unit cases declined 1%.
John Murphy: Having had a poor July but improving sequentially thereafter during the quarter concentrate sales were one point behind unit cases for the quarter drill.
John Murphy: Driven primarily by the timing of concentrate shipments.
John Murphy: Our price mix growth of 10%.
John Murphy: Was driven by two items.
John Murphy: Approximately seven points of pricing split somewhat evenly between normal pricing actions across our markets.
John Murphy: And intense inflationary pricing and a handful of markets experiencing currency devaluations and approximately three points of mix across our markets, which was primarily driven by stronger growth in several developed markets versus developing and emerging markets.
John Murphy: Excluding the impact from intense inflationary pricing organic revenue growth during the quarter continued to be at the high end of our long term growth algorithm.
John Murphy: Comparable gross margin was up approximately 70 basis points and comparable operating margin was up approximately 100 basis points.
John Murphy: Both were driven by underlying expansion and the benefits from bottler Refranchising.
John Murphy: Firstly offset by the impact of currency headwinds.
John Murphy: Okay.
Putting it altogether third quarter comparable EPS of <unk> 77.
John Murphy: Was up 5% year over year, despite higher than expected, 9% currency headwinds and 2% headwinds from butter refranchising.
John Murphy: During the quarter, we made a $6 billion deposit with the IRS related to our ongoing tax disputes.
John Murphy: We've also filed our appeal with the 11th Circuit Court.
John Murphy: We're pleased to move forward with the process.
John Murphy: We will vigorously defend our position we believe we will prevail and we will continue to keep you updated.
John Murphy: Free cash flow, excluding the IRS tax litigation deposit was approximately seven 6 billion.
John Murphy: Which is down approximately $290 million versus the prior year due to higher other tax payments.
John Murphy: Higher capital expenditures and cycling some working capital benefits from the prior year.
John Murphy: Our balance sheet is strong and our net debt leverage of one seven times EBITDA is below our targeted range of two to two five times. If you include our latest estimate of $6 $1 billion related to a fair life contingent consideration payments.
John Murphy: Which we expect to make in the first half of 2025.
Our expected net debt leverage would be at the low end of our target range.
Speaker Change: As James mentioned, our powerful portfolio amplified by our systems unique capabilities.
Gives us confidence in our ability to deliver on our updated 2020 for guidance.
Speaker Change: We now expect organic revenue growth of approximately 10% and comparable currency neutral earnings per share growth of 14% to 15%.
Speaker Change: Based on current rates on our hedge positions.
We now anticipate an approximate five points of currency headwind to comparable net revenues.
Speaker Change: And an approximate nine point currency headwind to comparable earnings per share for full year 2024.
Speaker Change: We continue to expect comparable earnings per share growth of five 6% versus $2 69 in 2023.
Speaker Change: While it is too early to provide specific guidance on 2025, we do want to share some considerations based on what we know today.
Speaker Change: We're encouraged by our underlying performance and believe we're well positioned to deliver on our long term growth opportunity.
Speaker Change: We expect pricing from intense inflationary markets to moderate in 2025 and recycling the impact of currency devaluations from these markets in 2024 with.
Speaker Change: With respect to our commodity environment, we expect prices on industrial materials to remain relatively stable, while agricultural commodities will continue to face volatility and higher prices we.
Speaker Change: We will continue to invest behind our brands as we have been doing while at the same time, we will leverage a range of productivity levers to drive efficiency and effectiveness across our P&L.
Speaker Change: We expect elevated net interest expense, resulting from the deposit made related to the ongoing IRS tax dispute and the upcoming fer life contingent consideration payment.
Speaker Change: Gardening currency, if we assume current rates on our hedge positions. It would be an approximate loss single digit currency headwind to comparable net revenues and an approximate mid single digit currency headwind to comparable earnings per share for full year 2025.
Speaker Change: Many factors could impact both our currency outlook and broader business outlook between now and when we expect to provide guidance in February.
Speaker Change: With our all weather strategy, we've delivered comparable earnings growth for many years now.
Speaker Change: We have numerous levers to continue to do so.
Speaker Change: So in summary successfully executing our strategy and an ever evolving operating environment, we're confident in our ability to deliver on our objectives in 2024 and over the long term.
Speaker Change: We're clear on the direction, we are heading as a system and we continue to invest with our bottling partners to drive sustainable long term growth.
Speaker Change: With that operator, we are ready to take questions.
Ladies and gentlemen to ask a question you will need to press star one on your telephone to withdraw your question.
Speaker Change: <unk> Press Star one again.
The interest of time, we ask that you. Please limit yourself to one question if.
Speaker Change: If you have any additional questions you may rejoin the queue.
Speaker Change: Our first question will come from Steve powers from Deutsche Bank. Please go ahead. Your line is open.
Steve Powers: Thanks, very much good morning, so James it sounds like momentum sequentially improved through the third quarter from a unit case perspective, which is welcome news I guess given that as you look forward. How confident are you that you can return trends to positive growth in the fourth quarter.
Steve Powers: And how much of an expected improvement trajectory is within your control through some of the initiatives you detailed in the prepared remarks versus the system being essentially more dependent on just.
Steve Powers: Just a less adverse macro backdrop. Thank you.
James Quincey: Yes, Thanks, Steve.
Steve Powers: Clearly.
Speaker Change: We were not as happy as we could have been in the third quarter with volume.
Speaker Change: And we focused on adapting quickly and saw improvements through the quarter. So July was the bump.
Speaker Change: Things improved in August through September I, largely believe that is within our control to return to growth.
Speaker Change: Actually the macro environment and I'm sure. We'll touch on later is showing a degree of resilience. There are lots of puts and takes with a degree of resilience.
Speaker Change: I think it's firmly.
Speaker Change: About getting a flywheel of the marketing the innovation the price pack on the execution of the system.
Speaker Change: And that we can get back to growth, which is very much implicit in our algorithm.
Speaker Change: And our expectations going forward.
Speaker Change: Through the fourth quarter into 2025.
Speaker Change: Our next question comes from Dara <unk> Morgan Stanley. Please go ahead. Your line is open.
Speaker Change: Hi, good morning.
Speaker Change: Just wanted to focus on the mixed component within price mix you mentioned it was 3% in the quarter.
Speaker Change: Great result, how sustainable is that as you look going forward out to 2025, and maybe can you talk about some of the key efforts on that front.
Speaker Change: Yeah, Let me let.
Speaker Change: Let me break the mix can Paul I mean mix has got a lot of different components in it.
Speaker Change: Country category channel affordability of premiums sessions in the third quarter.
There are a couple of pieces of mix that I wanted to call out one, which I see as enduring and ongoing and Walmart chassis is more temporary.
Speaker Change: During an ongoing piece is of course, we're focused on not just driving the growth of affordability options, whether they be smaller packages smaller multi packs better entry price points, all refillable, depending on where you are in the world as a key part of responding to those consumers that are on the disposable income pressure.
Speaker Change: Which tends to be a headwind, but also farming focusing on premium premium segments, whether that'd be premium orders off ally for or some of the coke skus.
Speaker Change: To get the mix to be up and so the more enduring piece is that ongoing management of affordability and premium amortization to drive mix. The betas was more temporary which is relatively atypical in the last number of years.
Speaker Change: Remember that the.
Speaker Change: Average price in emerging markets is lower than the average Pos in the developed economies.
Speaker Change: Quickly speaking the emerging markets grow faster so mechanically they are a headwind in price mix.
Speaker Change: Because they obviously have a lot of products in this quarter I typically the emerging markets have grown slower or have declined relative to the major economies U S Europe, Japan, Australia.
Speaker Change: That actually has a kind of automatic stabilizer effect.
Speaker Change: Which is that it makes price mix go up and of course, we're expecting as we go through the fourth quarter into next year to go to a more normal.
Construct where we will see decent results in the developed economies and foster growth in the emerging markets and that will then have a normal shape more normal checked with volume and a more normal shack to as price mix. So I think we feel good about where this is likely to go.
Speaker Change: Our next question comes from Lauren Lieberman from Barclays. Please go ahead. Your line is open.
Lauren Lieberman: Great. Thanks.
Lauren Lieberman: I would love to hear a bit more about those adapt.
Lauren Lieberman: Adapted quickly items, James that you kind of spoke to so.
Lauren Lieberman: <unk> in our control.
Lauren Lieberman: There's a lot there right. So I just would love if we could get some more maybe tangible examples.
Speaker Change: Of what Youre doing to adapt quickly that is having you are able to execute quickly and have a quick payback and since you teased the macro let's get your view on the macro environment as well thanks.
Speaker Change: Sure I mean, I don't think.
My view on the macro environment is going to take us to far east basically.
Speaker Change: Two big soldier worn at a global level.
Consumer and the economies and the IMF report came out yesterday is relatively resilient and relatively.
Speaker Change: Stable on a global basis, clearly there are a set of puts and takes between geographies between income levels.
Speaker Change: But the macros in aggregates.
Speaker Change: Some of us shifting set of puts and takes but resilience in aggregates.
Speaker Change: Exactly how that will turn out I am not sure next year, probably different puts and takes but again resilience.
Speaker Change: Overall.
Speaker Change: Our basis in terms of the tangible examples I mean, it's a question.
Speaker Change: Affordability like Anhui.
Pressing pressing hard on making the availability of certain affordable options, even more expansive growth, bringing forward for example investments in cold drink equipment. So that we can upscale the availability of coal product remembering for example that the southern Hemisphere is just about to go into the summer.
Speaker Change: Can we get further foster in terms of doing that which will then turn to Chris.
Speaker Change: Drive more volume growth.
Speaker Change: We are applying the right adjustment to the mix of the marketing messaging and how do we tweak that now that we have a more agile marketing model.
Speaker Change: The ongoing transformation, we are able to adopt the messaging so they really get in there.
Speaker Change: And get those things and then in some parts of the world It's about.
Speaker Change: Adapting the messaging to the situation I mean, some countries for example, where the economics are very poor it's not so much about the marketing it's more about the availability and the entry of the entry price of oil. So we've always got to work with.
Speaker Change: With our local board Lowe's to drive what's the right system answer and really fine tune, our relevance with consumers and the retailers in that country in this moment.
Speaker Change: Our next question comes from Bryan Spillane from Bank of America. Please go ahead. Your line is open.
Bryan Spillane: Thanks, operator, good morning, James Good morning, John.
Bryan Spillane: I guess my question about North America.
Bryan Spillane: And our observation through this quarter or over the summer was just.
Bryan Spillane: I guess a.
Bryan Spillane: A little bit of softness overall, and just discretionary spending so that kind of expressed in small format stores convenience and gas.
Bryan Spillane: I think also maybe a bit in foodservice. So can you just maybe talk to that.
Speaker Change: Are you seeing the same thing and is there maybe just a little bit of a recession. If you will on impulse purchases right now.
Speaker Change: And if so just what do you think changes that.
Speaker Change: I think it's.
Speaker Change: Honestly I think it's more of a more of a mix like this clearly parts of the tumor landscape.
Where there's pressure on disposable income.
Speaker Change: If you look I mean, if trends, whether you want to take measures of consumer confidence or measures of consumer sentiment I know that sounds like the same thing, but depending on which source you look at one's going once going up one's going down.
Speaker Change: There is a mixed bag I would say there is some softness in aggregate I'm pushed but it's very marginal in the total.
Speaker Change: Industry industry lacks the beverage industry is still pretty robust there is less growth in total dollars.
Speaker Change: We said that we talked about in previous quarters.
Speaker Change: As a set of consumers exhibiting value seeking behavior, whether theyre looking for combo deals when they're in away from home, particularly quick service restaurants, whether theyre looking for going and getting lower price point purchases all beverages, whether that's a smaller smaller pack size or smaller.
Speaker Change: Number of packs in a multi pack that's out of that but there's just there's also strong purchasing power and all of those segments of the marketplace, which is somewhat offsetting.
Speaker Change: Witness the strong momentum for example in <unk> life.
Speaker Change: But net net I think the U S marketplace has remained pretty resilient.
Speaker Change: On waters, given the China trajectory Macroeconomically speaking that we've come through.
Speaker Change: Yeah.
Speaker Change: Our next question comes from Chris Carey from Wells Fargo. Please go ahead. Your line is open.
Speaker Change: Yes.
Chris Carey: Hey, good morning, everyone. So.
Chris Carey: Yes. This has been somewhat dressed but I think that maybe be a little bit more specific.
Chris Carey: The stock off a bit pre market on what appears to debate.
Chris Carey: Round 2025 earnings growth given your outlook for FX and net interest.
Chris Carey: Expense going into next year, and I think the lesson from this year and really in recent years has been your ability to overcome the substantial FX headwinds and.
Chris Carey: Other headwinds and still deliver on reported EPS growth James John you both.
Chris Carey: We had some confidence in prepared remarks on <unk>.
Chris Carey: Division delivering against longer term targets. So I guess can you just touch on maybe some of the lessons of 2024 areas, which really allowed you to overcome what was a substantial FX headwinds.
Chris Carey: Headwind this year and still deliver you reported earnings objective, whether pricing or GM innovation, whatever that may be and what feels durable growing into next year I know you've touched on it but just trying to get down to what's really driving the stock today and then maybe importantly that I'm done, but just the areas, where you have a bit more of a heightened.
Chris Carey: Focus or sense of things may be slowing in Mexico, India and some of these lingering.
Issues in the Middle East.
Thing that comes to mind, so basically just <unk> got momentum.
Chris Carey: And frankly these headwinds next year, but the environment is also evolving.
Chris Carey: Just maybe like to.
Chris Carey: Put a little bit of a finer bull on that thanks.
Speaker Change: Sure, Chris I think youre going to win this year's price for the longest question.
Let me let me.
Speaker Change: Did that.
Speaker Change: Look let me start and then I'll.
Speaker Change: John will probably want to weigh in too.
Speaker Change: We have a normal all the years I am very deliberately chose the expression. The all weather strategy because as we are all live we've been through a lot of very atypical year as in the last five seven years and we wanted to make the point by calling in Norway. The strategy we can.
Speaker Change: If predict what's going to happen next year, we know some elements and John will talk about those but there are many other things that are going to happen, but we're going to pull the levers to get there and wrongly the business forward.
Speaker Change: On live on top line at the end of the top of the algorithm and underlying EPS growth. A couple of things that I think are worth noting about 2024 and its implications into 25. There is a difference, particularly if we still I mean, firstly FX as you said.
Speaker Change: The mid single digit coal for next year is less than it is this year, although obviously interest is high.
Speaker Change: There's a difference in FX or it's coming from the let's call them. The <unk> 10 economies.
Speaker Change: Sure, let's call it let's say in Europe.
Speaker Change: Simplest example, if theres a big devaluation of the euro there's not likely to be a lot of pass through inflation in the short term in the European marketplace, and thats going to be much harder for us to deal with though not impossible.
Speaker Change: If theres a big devaluation in the emerging market you tend to get more immediate pass through of the inflation and so you can see that in 2024 and 2020 for almost all of the devaluation all the FX headwind is a consequence of devaluations in the emerging markets and actually the <unk>.
Speaker Change: <unk> 10 basket is broadly flat I believe.
Speaker Change: And so you do have if it's coming from the emerging markets. There is a little more of a link back to above normal pricing on the topline, which again you see.
Speaker Change: In the year to date in 2024.
Speaker Change: There is a piece of next year, where we and John will get into it you got to to some extent C.
Speaker Change: G 10 as different to the emerging markets.
Speaker Change: The emerging market stuff is linked to the top line and then obviously within that we have to manage each of the of the market places because if there's high inflation.
Speaker Change: Likely to be a big push on affordability in a big shift in the marketing and innovation mix. So there's there's a set of <unk>.
Kind of framework.
Speaker Change: Approaches depending on what sort of a problem is occurring in the marketplace, but again, let me let me finish my thought and then kind of in the end we are pursuing all weather strategy. Some years, the headwinds will be greater than others, but we're going to pursue a strategy to get over the line in term.
Speaker Change: So trying to drive some growth and there's a lot that can still happen before next year.
Speaker Change: We'll come with a complete picture in February.
Speaker Change: John do you want to add.
John Murphy: Maybe Chris if I could touch upon some of the lessons that we've learned not just this year, but.
Speaker Change: Really over the last few years.
Chris Carey: First of all I'd say is.
Speaker Change: Really important.
Speaker Change: Taking all of this is to stay very focused on investing in the right way behind our brands.
Speaker Change: And.
Speaker Change: It's something we will continue to do.
Speaker Change: I think secondly in the last couple of years.
Speaker Change: Having an.
Speaker Change: And even sharper understanding as to where your profit drivers are.
Speaker Change: Underneath the global portfolio at the country casualty level.
Speaker Change: And then making sure this.
Over allocating resources.
Speaker Change: To support those larger.
Speaker Change: Profit pools boats in the base.
Speaker Change: Of the business and as we think about growth going forward.
Speaker Change: <unk> is really important and doing this in partnership with our bottlers around the world and we've seen that.
Speaker Change: Been a big source of the momentum over the last couple of years.
Speaker Change: I think the third area that I was I would highlight.
Speaker Change: No.
Speaker Change: Topic across many companies going into 2025 is that you can never take your foot off the productivity accelerator.
And in that context, I think the learning is that you've got to build that into your.
Speaker Change: And to your overall way of doing business as opposed to have it as a end of your projects that you need to.
Speaker Change: Kind of.
Speaker Change: To deliver something in the next six to 12 weeks of safety quarter. So we've got a lot of levers we've talked about it in the past that are available to us.
Speaker Change: So the marketing.
Speaker Change: Investment line, our operating investment line operating expense investment lines or to our supply chain.
Speaker Change: We will continue to.
Speaker Change: To go after the opportunities.
Speaker Change: That's come out Hudson and so when you take all of those together I think that's what we see creating that slightly of growth on the top line and then the ability to sustain and expand margins down through the P&L from there.
Speaker Change: Okay.
Speaker Change: Our next question comes from Bonnie Herzog from Goldman Sachs. Please go ahead. Your line is open.
Bonnie Herzog: Alright. Thank you good morning, I actually wanted to circle back to North America. Your organic sales growth is very strong at 12%.
Bonnie Herzog: Most of us by surprise and growth was primarily driven by the double digit price mix, so hoping for a little bit more color behind that in terms of rate versus mix in the market and then.
Bonnie Herzog: Ultimately how sustainable that is and then I guess second I'd be curious to hear if you believe maybe reached a point, where you push too hard in terms of pricing and if so.
Bonnie Herzog: How will you modify your pricing strategy, our RCM capabilities going forward. James you did touch on there's certainly a greater focus on affordability. So maybe an example, or two it would be helpful to hear thanks, so much.
Bonnie Herzog: Sure.
Speaker Change: Firstly in North America Q3, the price mix half in round numbers half of its price and half of it is made.
Speaker Change: So price closer to right the mix is being driven by palm of the <unk> some of the kind of less of a focus on.
Speaker Change: Case pack water, but a heavy investment behind brands like fire life Topo Chico some.
Some of the nutrition staff.
Speaker Change: Coca Cola and those tend to be mix positive.
Speaker Change: There is clearly a consequence actually John just talked about it really being choice will about where we invest behind which brands and which countries in which channels are not coming through in North America, which is why you got about half of that coming from mix and half of it coming from price right.
Speaker Change: Clearly, there's a balance that with some of the affordability actions, we're doing but that's the basic setup.
We just homing all price for a second so you're getting roughly half of that in price and that then starts to look a lot like the trajectory of CPI that has been coming down.
Speaker Change: And what we see going forward is they'll continue to be inflation in the input costs, whether that be labor, particularly some of the agricultural commodities.
Speaker Change: The packaging.
Speaker Change: Cost as well.
Speaker Change: All are still going to be increasing in cost although at a lower rate. So again, we see are heading towards a more normalized level.
Speaker Change: Pricing going into next year.
Speaker Change: I kind of landing landing in a more normal zone as kind of.
Speaker Change: Some of that tracks down.
Speaker Change: On a similar rights to CPI of course, we continue to be very choice full about where we invest for affordability options on where we invest the premium amortization is also I'm not sure I think mix will always be.
Four or five points, but certainly we would look for continued growth in the North American business.
Speaker Change: Yeah.
Speaker Change: Alright, thank you.
Speaker Change: Our next question comes from Filippo <unk> from Citi. Please go ahead. Your line is open.
Speaker Change: Hey, good morning, everyone.
Speaker Change: I wanted to ask on the margin outlook going forward.
Speaker Change: You realize very strong gross margin operating margin expansion on a lot of it driven by the refranchising activity with the underlying kind of being offset by currency.
Speaker Change: As we think about going forward.
Speaker Change: You guys, both talked about leverage on the productivity line.
Speaker Change: Maybe some some inflation in the agricultural commodity can you just talk us through like the violence of the levers for margin expansion into next year and then anything we should be we should be thinking about.
Speaker Change: Assuming north either refranchising activity. Thank you.
Speaker Change: Sure. Thanks for the question first of all.
Speaker Change: It's a huge area of focus and has been.
Speaker Change: Currently tracking to have our highest gross margin.
Speaker Change: Levels since since pre Covid.
Speaker Change: <unk>.
Underlying expansion to to continue notwithstanding the offsets that you just mentioned for 25.
Speaker Change: As we as we laid out in the script some of the considerations for 25.
Speaker Change: More normalized pricing environment, James has touched upon that.
Speaker Change: We will continue to look.
Speaker Change: Look to offset the.
Speaker Change: FX headwinds.
Speaker Change: With some underlying expansion to our <unk> and cost efficiency efforts.
Speaker Change: I've highlighted some of the.
Speaker Change: Challenges, we have on the agricultural commodities front.
Speaker Change: And we see that Ben.
Speaker Change: Part of the just the equation, we need to manage.
Speaker Change: We are.
Speaker Change: I said earlier looking us.
Speaker Change: A number of levers on the both the revenue and the cost lines.
Speaker Change: Our ongoing elevation on the RCM front.
Speaker Change: The.
Speaker Change: Optimization of on the promotional front.
Speaker Change: Within the innovation space things like simplification of product specs for example can free up a lot of dollars.
Speaker Change: The way, we have been working with our very diverse supplier base across the world not only for.
Speaker Change: For certainty of supply which is.
Speaker Change: It is a huge priority in a number of markets, but over time too.
Speaker Change: To leverage the scale of the system.
Speaker Change: Et cetera. So there's just a lot of a lot of opportunity and it's not any one big thing that's going to make or break the numbers.
Speaker Change: But I think it's our continued ability to bring.
Speaker Change: Bringing all of these levers to play that.
Speaker Change: Going to make a difference.
Speaker Change: And I think that's represented in the consideration set to be that way.
Speaker Change: <unk> for 2025.
Speaker Change: Great. Thank you.
Speaker Change: Our next question comes from Andrea Teixeira from Jpmorgan. Please go ahead. Your line is open.
Andrea Teixeira: Thank you and good morning, everyone, Hey, John you mentioned that volumes improved as you exit the quarter, but the implied organic sales growth for Q4, even after you raised is closer to I believe 6% from 9% in Q3, if my math is correct.
Andrea Teixeira: And you have the extra two days I'm, hoping to see if you can help US bridge. The most recent trends and how to think about Q4 and separately just a clarification.
Speaker Change: There was some recent news on potential ban the sale of CST and snacks, excluding Mexico, I know that historically the impact of the sugar tax but is not relevant at all.
Speaker Change: Just wanted to hear.
Speaker Change: How youre positioning cases spend materializes. Thank you.
Speaker Change: Let me go in and Rip.
<unk> soda.
I haven't read all the news in Mexico, I'm not sure it's happened yet, but we largely ship.
Speaker Change: No sugar set of portfolios recommendation tools schools, and that's part of our global approach. So I'm not sure how that models are not sure how that's going to impact the.
Speaker Change: The business I'd imagine that's going to be very small.
Speaker Change: That's all.
Speaker Change: In terms of.
Speaker Change: Q4.
Speaker Change: Let's I would own pocket inside look part of what is important here is what is going to be the.
Speaker Change: Flow through from some of these high inflation marketplaces, if you take.
The impact of high inflation is clearly being.
Speaker Change: Slowing down or lesser impact as we've gone through.
The year.
Speaker Change: And so youre going to see potentially less impacted in the fourth quarter from from that.
Speaker Change: In terms of where we're going in terms of.
Speaker Change: <unk>, yes, clearly theres going to be.
Speaker Change: A pickup in terms of price.
Speaker Change: In terms of the inventory sorry.
Speaker Change: And.
I don't think you quite got to the right number yet I think is probably implicitly a little higher but we can certainly follow up on that one I think it's going to be a strong outlook.
Speaker Change: Because at the end of the day.
My simple way of thinking about things if you take out all the moving pieces in the craziness.
Speaker Change: What goes on at the end of the day, if I take out the high inflation markets out of the price mix in Q3, you get six the volume was minus one that's five thats right in the range of the top end of outgrowth algorithm. The same as it has been each quarter. So far this year in <unk>.
Speaker Change: Yes, and if you just want to look at in simple terms, excluding high inflation.
Speaker Change: We are expecting is to say buying at the top end of our long term growth algorithm.
Speaker Change: Thank you our next.
Speaker Change: Our next question comes from coming out of <unk> from Jefferies. Please go ahead. Your line is open.
Speaker Change: I'm going to go for the worst for the shortest question.
Since the end user so.
Speaker Change: So new.
Speaker Change: With Mcdonald's and potential food contamination, I think theres a your largest customer is there anything we should know about how it impacts your business.
Speaker Change: Well, yes, you've got the pretty short question that look I think obviously.
Speaker Change: Hearts go out to the people who've been affected by the contamination.
Speaker Change: Certainly, we're big partner, Mcdonald's or a big partner of ours, we will will be helping them in any way we can.
Speaker Change: As they worked through whatever's happening here clearly the information is very thin.
Speaker Change: And on the ground.
Speaker Change: As it relates to those of US further away from the situation.
Speaker Change: Certainly when one looks at what's in.
Speaker Change: The media so far in terms of the states that have been affected.
Speaker Change: I would say at this stage, it's not going to be a large <unk>.
Speaker Change: Significant impact.
Speaker Change: The business.
Speaker Change: Our next question comes from Robert <unk> from Evercore. Please go ahead. Your line is open.
Speaker Change: Great. Thank you very much.
Speaker Change: CSD business in the U S.
Speaker Change: Is performing.
Robert <unk>: Quite a bit better than it has been a number of years ago and I'd like to kind of get your sense of the drivers on that is is it the zero sugar products.
Speaker Change: Is it better.
Speaker Change: Engagement with younger drinkers is it market share gains.
Speaker Change: And then more specifically this year.
Some of the data that we're looking at seems to suggest that cst's are.
Speaker Change: Re taking market share from energy drink, so a lots of pieces, there, but love to get your assessment of what's going on thank you.
Speaker Change: Yes. Thanks.
Speaker Change: Well, firstly I am tempted to go whats driving the growth of the soft drinks as all of the above.
Speaker Change: In terms of what we've been doing to make our brands more relevant.
Speaker Change: I think the North America team have done a good job across the portfolio to be found me. If you look at the third quarter, our Coke trademark grew volumetric speaking.
Speaker Change: The other sparkling beverages grew volume actually speaking I mean within the Coke trademark.
Speaker Change: Coke original was broadly with broadly flat.
Speaker Change: And Coke zero was double digit growth and even dark outgrow.
Speaker Change: So I think theres been strong leveraging of them ongoing marketing transformation pad with.
Speaker Change: An improving set of execution by the bottling system work on the our jam in the pack mix and execution marketplaces that are bringing bringing greater strength to.
Speaker Change: To the sparkling beverage business.
Speaker Change: In North America. It has certainly been the accumulation of many quarters of work and it's starting to show through both both when you look at the third quarter.
And also if you were to look at.
Speaker Change: It is also an improving trend through the year.
Speaker Change: Our next.
Speaker Change: Comes from Charlie Higgs from Redburn. Please go ahead your line is open.
Charlie Higgs: Yeah, Hi, James General picture of well I'd like to dig into that unit case volume was down 1% Q3, a bit more please.
Charlie Higgs: If you could maybe just quantify to contextualize some of the consumer hesitancy that essentially in Q3.
Charlie Higgs: Is it about the same as Q2 better or worse and then we will see some of the impacts from the portfolio trimming Youre doing.
Charlie Higgs: I'm, just trying to get a sense of look like.
Charlie Higgs: Clean volume performance in Q3.
Speaker Change: Then just building on that maybe you could touch a bit more on trademark coke.
Speaker Change: Zero accelerating to 11%.
Speaker Change: Thompson, James that's incremental and not coming from Coke classic.
Speaker Change: Yeah.
Speaker Change:
Speaker Change: We can we can break down the volume lots of different ways.
Speaker Change: First and most important piece of the puzzle I sort of mentioned it earlier.
Speaker Change: Is the relatively atypical makeup of the volume in Q3.
Speaker Change: In other words, there was actually good performance.
Speaker Change: Volume in volume terms.
Speaker Change: Cross the developed economies.
Speaker Change: North America, although it is flat.
Speaker Change: It had growth in the sparkling beverages had growth in the kind of the premium stills are utilized across multiple categories and we had the prior some of the the process some of the case pack water.
Speaker Change: Actually North America had a good point Europe grew Japan grew Australia, so and they grew not only did they grow it with the pressure would actually come from the emerging markets and that pressure in emerging markets was concentrated in a set of markets some with temporal factors and some with some ongoing issues.
Speaker Change: The temporal factors or more.
For example, Mexico was FICA was cycling in this quarter, a very strong Q3 last year, Brazil continued to be good, but Mexico was cycling.
Speaker Change: Strong Q3 last year, which made a Latin America looked like it came off but actually we still think the momentum is good that India had a particularly heavy monsoon in a number of states.
Speaker Change: And that affected the volume in India actually by the wide heavy monsoons tend to be a good predictor of agricultural yield.
Speaker Change: Which would be then better next year, that's clearly going to be a temporary factor and we'd be looking for India to return to growth parts of the world that are on the more ongoing pressure are particularly China, and Eurasian markets or Eurasia, and the middle East are clearly here, we still see a couple of things going on.
Speaker Change: One one.
Speaker Change: One.
Speaker Change: In China, Yes, the economy is kind of.
Speaker Change: Not taking off bus.
Speaker Change: Some of what's going on the choices. We've made we chose to de prioritize Some award is an equivalent terms case pack water.
Speaker Change: We focused on growth.
Speaker Change: In the sparkling beverages.
Speaker Change: China, So actually Coke grew volumetric play.
Speaker Change: In the third quarter in Japan, so it clearly about some of it's about the choices, we make but we need to focus more on the things we can control in China top better marketing innovation and execution, but we see.
Speaker Change: Light at the end of the tunnel and long term investment opportunities for the China business Eurasia business is more of a confluence of factors. The spillover from the middle East conflict plus there's a set of markets that are undergoing quite significant macroeconomic adjustments.
Speaker Change: And that is also coming together.
Speaker Change: To kind of create a relatively big headwind volumetric Lee speaking.
Speaker Change: Our next question comes from Bill Chappell from <unk> Securities. Please go ahead. Your line is open.
Speaker Change: Thanks, Good morning.
Can you just dig a little bit further into fair life I guess.
Bill Chappell: Maybe the size of it at this point are we nearing $1 billion.
Bill Chappell: Much impact is it having on mix and kind of the prospects as we look to next year can it continue to expand or do you have tougher comparisons because it's really been a big driver, particularly in the past kind of 12 to 18 months, just trying to understand the prospects going forward and how much impact it's now having on north American overall sales. Thanks.
Speaker Change: Well for sure it's going to be $1 billion brand.
Speaker Change: It's certainly pass that Mark a while ago.
I think firstly like one of the most kind of I think standout facts about the north American businesses and I think we said it in the script is.
Speaker Change: The two biggest brands in terms of retail dollars added to the North American beverage landscape by any brand.
Across the whole industry is Coca Cola trademark unfair life and that shows you I think the ability to take something that's been around for 138 years I make it continues to be relevant and take something.
Speaker Change: Not much more than a decade old and make that relevant to and so yeah, it's having an impact on mix because last year you were consolidating.
Speaker Change: Our vertically integrated business.
Speaker Change: And so there's a mechanical effect that the revenue line, which is part of that slightly outsized contribution from mix that I talked about earlier, but it's also delivering on the bottom line, but just to allay fears that somehow that means that the rest of the business is not doing Oh no.
Speaker Change: The North America ex fell off is also growing top line, gaining doing well and growing profit. So both engines are firing.
Speaker Change: All the engines firing and it's not just one engine, which I think is very important to understand.
Speaker Change: And it can certainly continue to find I mean, clearly next year, we're going to be cycling a very strong year.
Speaker Change: We are in the process has previously advertised.
Bringing online more capacity than New York plant.
Speaker Change: Is being dug out of the ground or built out of the ground as we speak.
Speaker Change: And so we will what we will we'll be aiming to blend in that capacity.
Speaker Change: Clearly, it's going to be hard to cycle. This year's numbers until we get the capacity.
But I think there's huge opportunity and demand in the marketplace.
Speaker Change: We just need to continue to run keep it relevant and bring online the capacity.
Speaker Change: Our next question comes from Kevin Grundy from BNP Paribas. Please go ahead. Your line is open.
Kevin Grundy: Great. Thanks, Good morning, everyone was hoping to pivot to the alcohol strategy and learnings there I think it's got a little bit less attention from investors more recently the company has about a few years or so.
Kevin Grundy: So to the strategy of extending some of the brands you have a number of different partners in this space with a number of different trademark maybe comment number one sort of broader learnings here a few years and then two which opportunity do you think are scalable globally and can become a more meaningful part of the portfolio. Thank you.
Speaker Change: Yes sure.
Speaker Change: Yes, it's a couple of years and still very very early days I would advertise here a kind of an overall learning that most things take a decade to work out whether theyre going to arrive at scale a minimum of seven years and that's true even if you look back of the beverage industry. The most successful of any brands is very hard to tell whether.
Speaker Change: Got really breaking through to scale until about year seven and it took at least will be attended to get the skylines often much longer. So a few years is still relatively early days in terms of really building out something that scale. So that's point number two we have been taking a measured approach to work out what will work.
Speaker Change: And we've got some good learnings on we've pivoted, where things didn't work and we've kind of continued to advance where where things are I think in terms of you kind of implicit in the question is like is one of these is going to work in the other words, knocking about I don't think I see this category that why I don't think theres going to be one.
Speaker Change: <unk> that is 50% of the market I think he is going to be much more than the alcohol industry has more variety of more variety seeking behaviors and therefore I think it is going to be more about also using a combination of some partners.
Speaker Change: Ready to drink offerings, like Jack and Coke, Bacardi, and Coke absolute and sprite complemented with a set of our own.
Speaker Change: Brands.
Speaker Change: TD like simply spiked or minimized.
Speaker Change: The portfolio effect and I think it's going to be about having a robust portfolio of choice.
Speaker Change: Is gonna be the approach that is likely to do well in <unk> and if you look around the world.
Speaker Change: The few buckets and they're only relatively few where IRT D. As a meaningful percentage of the big relative to be then.
Speaker Change: That's the characteristic that stands out so the question is can we put together.
Speaker Change: <unk> that can be affected not just in share terms, which I think is.
Speaker Change: As possible, but in terms of.
Speaker Change: Making <unk> a relevant size category.
Speaker Change: Very good thank you.
Speaker Change: Our next question comes from Robert Moskow from TD Cowen. Please go ahead. Your line is open.
Speaker Change: Hi.
Speaker Change: A quick question.
Speaker Change: You expect price mix to decelerate next year some of it's due to North America. Some of it's due to the Hyperinflationary markets.
Speaker Change: So do you expect any benefit.
Speaker Change: Benefit to volume from that like is there elasticity assumption.
Speaker Change: You did sound very positive about volume into 2025.
Speaker Change: Yeah, there is a certain mechanical effect to price mix and volume.
Speaker Change: In other words, I'm expecting 25 to be the inverse of the third quarter and otherwise I would expect the emerging markets to really take that more traditional position of growing faster than the developed economies, which will obviously contribute to volume growth, but instead of but it won't contribute to a positive price.
Speaker Change: So I think there'll be some stabilization.
Speaker Change: Yeah.
Speaker Change: And that kind of relationship such that next year, it's going to look more like.
Speaker Change: Essentially what this year's looked like wishes that you got some volume growth a more normal level of volume growth on a more normal level of pricing with a kind of a top up of what will still be residue amount off high inflation rate countries and that's likely to be where 2025 is heading.
Speaker Change: Okay. Thank you.
Speaker Change: Our last question today will come from Carlos Laboy from HSBC. Please go ahead. Your line is open.
Yes, good morning, everyone.
Carlos Laboy: I have a north America specific question can you tell us more about the improving system digital capabilities are being built.
Carlos Laboy: You might find most promising promising as you look forward to accelerating volume and revenue growth and how are your compelling the bottlers to make investments behind these capabilities.
Speaker Change: Yes sure Karla.
Speaker Change: I mean from us from a bottling system point of view I think why.
Speaker Change: It's the expansion of the digital engagement with the retail system.
Speaker Change: As always though.
Electronic ordering in the modern trade and that's been around a long longwall, what's really interesting about what's going on is more in the kind of mom and pop traditional tried or independent tried.
Part of the marketplace, which is not just the ability to provide a platform, which allows the retailer to engage with the ordering system 24, seven rather than waiting for the pre sell it to turn up they can engage to add.
Speaker Change: Older add to water. They can register service request for the cool those off of merchandising materials, but also as we start to get into II. The system kind of also start interacting with the retailers.
Speaker Change: <unk> suggested suggested orders and the engagement not just from the retailer to the bottler in terms of ordering a service that actually from the bottler.
Speaker Change: To the right Tyler, suggesting orders because of what was happening there might be some events coming up that might be people like you buy these sorts of things you should add and so really see a combination.
Speaker Change: Enhancement to the market developers, who are out there it's not going to go from being a human system 2 million entirely electronics system, I think it's going to be about the <unk>.
The enablement of the humans to be as productive as they can be whether those app resellers.
Speaker Change: Developers all the retail operators themselves and so I think he is very exciting and the bottlers are leaning in to the investments in this area.
Speaker Change: So.
Speaker Change: With that.
Speaker Change: Just to conclude we think we're well positioned to deliver on our ambitions towards 2024 and over the long term.
Speaker Change: We're certainly managing near term uncertainty as we continue to build a system for long term.
Speaker Change: And we're confident we will create sustainable value for our stakeholders. Thanks for your interest your investment in the company and for joining US This morning.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Speaker Change: Hello.
Speaker Change: I believe when you go phase one.
Speaker Change: Yes.
Speaker Change: And then if you will.
Speaker Change: We can meet them.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: [music] Bonnie.
Bonnie Herzog: Thank you.
Let me say.
Bonnie Herzog: Okay.
Bonnie Herzog: Okay.
Bonnie Herzog: Okay.
Yes.
Bonnie Herzog: Okay.